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Providing Solar Energy Where the Sun Shines

Solar power
is becoming increasingly prominent in India and the sector is generating considerable
interest among investors with over $4.5 billion of new investments announced in
the last twelve months.

The
cost of solar panels is falling as electricity costs are rising and it
is now more economical for industrial and commercial consumers to switch away
from conventional power sources, such as coal, towards alternative power
sources.

This
economic turning point—often referred to as “grid parity”—has contributed to a
dramatic increase in India’s solar power capacity to 4.5GW (as of June 2015),
of which 2GW was added in the last two years.

A persistent power deficit and energy security concerns have led to the
government of India to target solar power production of 100GW by 2020.
The
economic trends underlying this growth are compelling:
·

System costs have
declined at 15% p.a. over the last eight years due to improved technology and
competition, and economies of scale and other factors may lead to a further
30-40% reduction in costs over the next 4-5 years.

Given the high
cost of electricity in India and large
power deficit (national peak power deficit of 4.7% during 2015, with certain regions
as high as 12.9%), private solar power production can yield strong returns on
equity (“ROE”) - Deutsche Bank estimates
a 19% average ROE for typical solar projects in India (“India
2020: Utilities & Renewables”,
Deutsche Bank Markets Research, 19 July 2015).

Seeking to narrow the
country’s power deficit and reliance on coal imports, the Government of India
has implemented a number of fiscal incentives to enhance the return profile of
solar power investments and attract domestic and foreign investment. These include:

1.
Feed-in-Tariffs (FIT): Preferential tariffs provided by central and
state regulators for solar power production

3.
Open
Access: State policies permit the sale of solar power directly
to end users through open access to the electricity grid at concessional charges

4.
Renewable
Purchase Obligation (RPO): An obligation for power producers
to procure renewable energy to meet the Indian government’s target of procuring
15% of its electricity consumption from renewable energy sources by 2020 (of
which over 8% would be specifically from solar power)

5.
Renewable
Energy Certificates (RECs): Credits that are traded on power
exchanges at market-determined prices with floor and cap prices fixed by the regulator
to provide additional revenue to renewable energy developer

7.
Accelerated
Depreciation (AD): A company is allowed to claim depreciation
benefits equal to 80% of capital expenditure for solar power production in the
first year of plant operations

8.
Priority
Sector Lending: The Reserve Bank of India has included
alternative energy investments up to INR 150m under priority-sector lending.

Solar
power is now considered core infrastructure for India; if an additional 5GW of solar capacity is added each
year from 2016-2020, India’s dependence on coal could decline by 8%.

In summary, this combination of fiscal
incentives and the declining cost of solar power provides India with significant
cost savings, making the provision of solar power a priority for the central
government.

One of the
leading investors in the Indian solar power is Nereus Capital (“Nereus”). Nereus
is an alternative asset manager comprising a private equity team made up of
individuals with collective experience of investing in excess of $1Bn in India
and an operational team made up of individuals who have collectively developed
over 1,800MW of Indian power assets.”

The firm has established two affiliate
entities, Nereus Capital Investments (Singapore) (“NCIS”) and Nereus Capital
Investments (Singapore) II (“NCIS II”), to develop, construct and operate
utility-scale photovoltaic (“PV”) solar power plants in India.
The Nereus team is differentiated by its combination of a finance team
with a development team. Members of the team have previously led ten
transactions in Indian alternative energy and nine transactions in the
conventional energy sector aggregating to US$500 million investment and over
1,800MW capacity.

The Nereus
team’s approach to development enables high project-level returns with low
variance through contractual risk mitigation. Power plants are constructed by
reputed construction partners through fully wrapped contracts that guarantee
the minimum efficiency of the plant. Energy generated by the assets is sold to
creditworthy customers through long-term, privately-negotiated agreements
creating visibility into contracted revenue and an attractive risk-return
profile.

Through
its experience in structuring global investments into India, the Nereus team is
able to maximise distributable proceeds available from the projects by using
optimal capital and transaction structures. These structures provide a high
level of governance and security while enabling consistent annual distributions
from the projects to investors.

Emerging market infrastructure investments can yield excess return if
approached in a risk-aware manner by a manager with adequate in-market presence
and expertise. Specialist asset managers in renewable energy infrastructure,
such as Nereus, are ideally placed to take advantage the huge catalysts for
solar power in India.